Arbitration agreement and its drafting

1. Definition: section 7

• Section 7(1): an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
• Section 7(2): it may be an arbitration clause in a contract or a separate agreement. A clause for future disputes and a submission of an existing dispute are both covered.
• Section 7(3): it must be in writing.
• Section 7(4): it is in writing if contained in (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication, including communication through electronic means (added in 2015), which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which one party alleges the agreement and the other does not deny it.
• Section 7(5): a reference in a written contract to a document containing an arbitration clause makes that clause part of the contract, if the reference is such as to incorporate it.

2. Essentials

From section 7 and K.K. Modi v. K.N. Modi, 1998 INSC 63, (1998) 3 SCC 573:

• a present or future dispute in respect of a defined legal relationship;
• an intention to refer it to a private tribunal and to be bound by its decision;
• the tribunal must decide judicially, after hearing both sides;
• the agreement must be in writing;
• the parties must have capacity to contract, and the subject matter must be arbitrable.

In Jagdish Chander v. Ramesh Chander, 2007 INSC 474, (2007) 5 SCC 719, a partnership deed said that disputes “shall be referred for arbitration if the parties so determine”. The Court held this was not an arbitration agreement: it showed only a possibility of a future agreement to arbitrate. Words such as “may”, “if the parties so agree” or “can be referred to arbitration” suggest an option, not a binding obligation. A clause that names no arbitrator is still valid; section 11 fills the gap.

3. Effect: section 8

A judicial authority before which an action is brought in a matter that is the subject of an arbitration agreement shall refer the parties to arbitration if a party applies not later than the date of submitting his first statement on the substance of the dispute, unless it finds that prima facie no valid arbitration agreement exists (section 8(1), as substituted in 2015). The application must be accompanied by the original agreement or a certified copy, or a request to call for it from the other party (section 8(2)). The arbitration may begin or continue while the application is pending (section 8(3)). For foreign-seated arbitrations, section 45 requires reference unless the agreement is null and void, inoperative or incapable of being performed.

4. Separability and kompetenz-kompetenz: section 16

• The tribunal may rule on its own jurisdiction, including objections to the existence or validity of the agreement (section 16(1)).
• An arbitration clause is treated as an agreement independent of the other terms of the contract, and a finding that the contract is void does not by itself invalidate the clause (section 16(1)(a) and (b)).
• A plea of lack of jurisdiction must be raised not later than the statement of defence; a plea of exceeding authority, as soon as the matter is raised (section 16(2) and (3)).
• If the plea is rejected, the tribunal continues and the party challenges the final award under section 34 (section 16(5) and (6)). If the plea is accepted, an appeal lies under section 37(2)(a).

5. Unstamped agreements: the seven-judge Bench (2023)

In N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd., 2023 INSC 423, a five-judge Bench held by majority that an arbitration agreement in an unstamped instrument could not be acted on at the section 11 stage. Within months a seven-judge Bench reconsidered the point in In re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, 2023 INSC 1066, (2024) 6 SCC 1, decided on 13 December 2023. It held:

• an agreement that is unstamped or insufficiently stamped is inadmissible in evidence, but it is not void or unenforceable; the defect is curable by paying the duty and penalty;
• an objection on stamping does not fall for determination by the court under sections 8 or 11; the court examines only whether an arbitration agreement prima facie exists, and the stamp objection is for the arbitral tribunal;
• SMS Tea Estates (2011), as reiterated in N.N. Global (2023), is no longer good law.

6. Who is bound: parties and non-signatories

The agreement binds the parties and persons claiming through or under them (sections 8 and 35), and survives the death of a party, binding his legal representatives (section 40). In Cox and Kings Ltd. v. SAP India Pvt. Ltd., 2023 INSC 1051, (2024) 4 SCC 1, a Constitution Bench accepted the group of companies doctrine: a non-signatory company of the same group may be bound where the conduct and intention of the parties show that it was meant to be a party, judged by factors such as its participation in the negotiation and performance of the contract. The definition of “party” in section 2(1)(h) includes signatories and non-signatories.

7. Drafting an arbitration clause

A good clause answers every question that would otherwise need a court:

• Scope: “all disputes arising out of or in connection with this agreement, including its existence, validity or termination”.
• Mandatory words: “shall be referred to and finally resolved by arbitration”, not “may be referred”.
• Number of arbitrators (odd, section 10) and the method of appointment, avoiding unilateral appointment by one side (see the next note).
• Seat (section 20) and venue, kept distinct.
• Language (section 22).
• Governing law of the contract and of the arbitration agreement.
• Institution and rules, if institutional; whether fast track (section 29B) applies.
• Costs: an agreement that one party pays the costs in any event is valid only if made after the dispute has arisen (section 31A(5)).

Model clause: “Any dispute arising out of or in connection with this agreement shall be referred to and finally resolved by arbitration by a sole arbitrator appointed by mutual consent, failing which under section 11 of the Arbitration and Conciliation Act, 1996. The seat of arbitration shall be Bengaluru and the language English.”

How this is examined

“Arbitration agreement” was a short note in November 2021. Write section 7 clause by clause, the essentials from K.K. Modi, Jagdish Chander on optional words, and the effect under section 8. For a long answer add separability under section 16, the 2023 stamp decision and a model clause. Problems that ask whether a clause is an arbitration agreement turn on the words used and on writing.